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On the value of health insurance plans

by Galen Benshoof

The ACA establishes a new way for consumers to distinguish between insurance plans. Metal levels—Bronze, Silver, Gold, and Platinum—provide a guide for what kind of cost-sharing consumers should expect. Unsurprisingly, low deductibles and copays come at a price. Platinum plans, with the lowest cost-sharing, have higher premiums. At the other end, Bronze plans, with the highest cost-sharing, have lower premiums. Gold and Silver fall in between. By law, Bronze plans must have an actuarial value of 60%, with Silver plans at 70%, Gold plans 80%, and Platinum plans 90%. But what exactly is actuarial value?

Journalists frequently get the concept wrong. As just one recent example, yesterday the New York Times reported the following about a woman in Maryland:

She is leaning toward a silver plan, which covers 70 percent of expenses under the new law’s formula.

Here, the 70% is presented as actual value. But that is mistaken. Actuarial value is not about an ironclad amount that consumers should expect insurers to pay. Instead, it is helpful to view actuarial value as an overall average. See this formula from Consumer Reports:

Across a standard population, the actuarial value of a Silver plan will be 70%. But the proportion of covered benefits will actually vary from consumer to consumer.

Here is how I would define a Silver plan.

In a standard population containing both sick and healthy people, the insurer will cover 70% of covered benefits for the average policyholder. Through some combination of deductibles, copays and coinsurance, the average policyholder will pick up the remaining 30%. But that is only an average. The experience of individual consumers will fluctuate around that average. Some will pay more than 30% of their medical bills, others less. On average they pay 30 percent.

The first sentence is key. If you only need preventive care, which comes at no cost to you under the ACA, then the actual value of your plan will be high, because you don’t pay out of pocket for any of your benefits. On the other hand, those who are less healthy will generally pay more than 30% of the cost of their care. How exactly does that work? Say you are a consumer with substantial health needs who has hit your deductible. As a mental exercise, divide the amount of your deductible by the total value of the services you accessed this year (apart from preventive care). The higher your deductible, the greater your share of each of those particular services. And the greater your share, the more likely you are to exceed the average consumer share.

But it’s also possible for high-cost enrollees to pay less than 30% of their benefits under a Silver plan. If such a consumer maxes out her deductible and hits her out-of-pocket limit, but continues to need expensive care, the proportion of the cost picked up by the insurer will begin to increase.

Here’s a good rule of thumb: the less healthy you are, the greater share you pay, up to a point. Put more broadly, actual value of your plan depends on what services you access.

So why should the media care about actuarial value?

Many consumers, having only heard exaggerations and attacks on the ACA, feel trepidation about buying private coverage under the law. Others feel burned by the president’s “you can keep your plan” pledge. In such a sensitive environment, it’s especially important to present accurate information to readers, even if that information is complicated. Due to much of the reporting out there right now, some consumers may elect a Silver plan because they like the idea of it paying 70% of their benefits. But in all likelihood, the insurer won’t pay exactly 70% of their benefits. Depending on the circumstances, it may pay as little as 65 or 60%, meaning the consumers would be responsible for 35 or 40%. Such an outcome may make them angry. They would have a right to feel misled. The difference between 30 and 40% of covered benefits could easily be in the hundreds of dollars. We’re talking about real money.

Here is a simple suggestion for how reporters should describe a Silver plan:

A Silver plan covers 70% of benefits for an average consumer. The amount that the insurance company will pay for a specific individual will depend on the services he or she accesses over the course of a year.

It’s not substantially more words than the prevailing definition, and it maintains accuracy.

It’s important to remember, however, that metal levels do not reveal everything about coverage. Plans can arrive at the same actuarial value using very different methods. For example, a 70% AV Silver plan could have high deductibles and low copayments, or it could have low deductibles and high copayments, or it could have low deductibles for care and high deductibles for prescription drugs. Consumers should not only examine the various metal levels, but also the different cost-sharing requirements within them in order to find the plan that meets their needs.

Finally, given their Olympic connotations, it is natural to think of Bronze, Silver, and Gold as quality or worthiness ratings, but actuarial values deal only with the level of coverage. They say nothing about the customer service of the insurer, let alone the scope of the provider network. The metal level of a plan is an important indicator, but it is only one element in a broader formula. Reporters and advocates should encourage consumers to evaluate their coverage options using as much accurate information as possible.

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Galen is a Master in Public Affairs candidate at Princeton University’s Woodrow Wilson School, where he focuses on health policy. Find him on Twitter: @benshoof.